Osborne urged to avoid ‘dark shadow’ of further austerity

A top economist has urged the Chancellor to avoid “the dark shadow” of further austerity measures in next month’s Budget or risk undermining the economic recovery.

Prof Brian Ashcroft of Strathclyde University says George Osborne should instead take action to boost productivity and raise investment that will lift wage levels.

His latest report from the university’s Fraser of Allander Institute shows the Scottish economy has enjoyed positive growth for the last 11 quarters (since Q1 2012) while the UK’s recovery period has been shorter at eight quarters. Even so, the UK recovery in output and jobs is still stronger than in Scotland.

Prof Ashcroft adds that “threats to recovery remain, including the UK Government continuing, or even tightening, planned austerity measures in the forthcoming Budget on 8 July.”

There is also a growing threat of a Greek exit from the euro with the risk of contagion to other economies.

Prof Ashcroft says: “In his forthcoming Budget, it is crucial that the Chancellor takes action to minimise the threats to the recovery by encouraging productivity and real-wage enhancing investment. He should also consider increased incentives to exporters and, at a minimum, a slowing in the pace of his fiscal consolidation plans.”

The Institute also warns that sustainable recovery is being threatened by a combination of unbalanced growth that relies unduly on household spending that depends mainly on rising and potentially unsustainable personal debt, and the UK’s overall weak trade performance.

Glimmer of positive influences

The institute’s latest Economic Commentary outlines a number of positive influences on the Scottish economy that are collectively stimulating demand for Scottish goods and services. Infrastructure spending, with projects such as the Forth Road Bridge and M8 completion, are complemented by a steady stream of foreign direct investments, with over 80 inward investment projects coming to Scotland in 2014.

Domestic inflation remains close to zero and, combined with even modest earnings/income growth, is helping to boost real incomes, it says. External demand remains reasonably strong, with growth in the Eurozone beginning to strengthen while US growth, which faltered earlier in the year looks set to pick up again.

Prof Ashcroft, says: “We should not underestimate the threats to the recovery from rising household debt, little growth in real wages, the dark shadow of further austerity and the rising possibility of Greece leaving the euro.”

The Institute speculates that the stronger UK recovery may, in part, be a reflection of a stronger recovery of R&D activity in rest of UK compared to Scotland.*

Paul Brewer, Government and Public Sector partner, PwC in Scotland which supports the research, said: “There is some real evidence of recovery across Scotland, with infrastructure and construction in particular, making a real contribution to growth, reflecting both growing business confidence and the impact of major projects like the Forth Crossing and M8 completion.

“While we hope that these trends continue, the service sector has not demonstrated the levels of growth experienced in other UK regions and that remains a cause for concern.

“The impending referendum on UK membership of the EU remains on the horizon and, while it has not apparently made any significant impact on investment and foreign direct investment, there is little doubt that, as 2016 and the referendum loom, so-called ‘Brexit’ will become a concern, particularly for the financial services sector.”

Economic forecast

The Fraser of Allander Institute forecast for GDP growth is 2.5% in 2015, 2.3% in 2016, and 2.3% in 2017; a slight downward revision from its March 2015 forecasts. The downward adjustment reflects the evidence of a slight slowing in the recovery in the first half of 2015.